The Unintelligent Investor

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Monday, March 25, 2013

How is everyone going? This year has progressed so
quickly, I’m almost done with my first rotation, got 4 pay checks already but
still struggling to break even thanks to random unavoidable spending like
expenses related to moving from Newcastle to Canberra, telephone and internet
connection fees and things like that.

Anyhow, continuing with this year’s project, the next
indicator on the list is P/E growth ratio or PEG ratio.

PEG Ratio = P/E ratio ÷ annual EPS growth

We should all know what a P/E ratio is by now. EPS growth
or earnings per share growth is fairly straight forward as well I guess, if the
EPS grows from 10 cents to 11 cents, that is a growth of 10%. So if the P/E
ratio is 10 and the EPS growth is 10, that gives us a PEG Ratio of 1. The
theory is that if the company is fairly priced, its P/E ratio will equal its
growth rate (PEG Ratio of 1). If the PEG ratio is below 1, that could indicate
that the stock is underpriced and if it is above one, it could mean that it is
overpriced.

Sometimes the PEG ratio could be a negative number, is
those cases, the company’s earnings are expected to decline.

Keep in mind that different websites calculate the PEG
ratio differently. They can either a projected or trailing P/E ratio and annual
growth rate may be the expected growth rate for the next year of the next five
years. So just keep in mind that PEG ratios can be different depending on where
you look.

I personally do not look at PEG ratio much. I sometimes
look at it when a company have a very high P/E ratio and if the PEG ratio is
low, it could mean that the high P/E ratio is backed by a high growth rate.

I don’t really know how good or reliable it is as an
indicator for value of a stock. But I’ll have to say like all other indicators,
it is probably a good idea to not just base an investment decision on the PEG
ratio. Remember to look at the entire company as a whole and of course ask for
advice from a financial planner.

Feel free to leave a comment or shoot me an email. I’m happy
to hear your opinions on PEG ratios.

Monday, March 11, 2013

If you’re still a frequent visitor of this site, you
might have noticed that last year was a very quiet year for me financially. I
probably executed a total of 5 trades on my account; most of them buys and
wrote two posts for this site. Most of my efforts went into not failing final
year of medicine, even so I failed my psychiatry short cases and had to repeat
it. Thankfully I passed it the second time and I’m a registered doctor working
in Canberra now!

With a new career come new responsibilities, obviously.
One of the big ones is tax. My situation tax situation is quite interesting
this year. Australia’s financial year ends in the middle of the year, so 30th
June. I started working in January that means my taxable income for this
financial year is only half of my year’s salary (which is not a lot). On top of
that, being a doctor working in a public hospital, we get other benefits like
fringe benefit tax and other salary packaging goodies. If I put all of them
together and cleverly and legally deduct tax deductable items I’ll be paying
very very very little tax for this next 6 months, which is nice but is also a
very rare opportunity, unless I stop working for 6 months in the future.
Starting next financial year I’ll suddenly be taxed a lot because I would have
been working the full financial year.

Taking all of that into consideration, I have decided to
liquidate my (very small) share portfolio. This is how the trades look like.

As a result of making this decision, capital gain from
the shares are 18.72% which is not bad considering the ASX S&P 200 returned
about 7.5% in the last 3 years. I certainly got lucky with Flight Centre. I’m
not sure how much I gained from dividens because I lost track :P so we’ll
exclude that for now. Only half of the capital gains will be taxed because I’ve
held them for more than a year and from the taxable half, my tax rate will be
around the 15% mark this financial year. If I sold it after 30th
June, my tax will be more than 30%, saving 15% there.

Besides the tax savings, this decision has given me the
opportunity to “reset” my investment portfolio. Now because my portfolio is
small and if I want to save for a home loan deposit, I cannot afford to lose my
capital. I’ll focus on saving a portion of my salary, capital preservation and
low risk investments like Index Traded Funds, term deposits and high interest
online banking accounts (Combank’s goal saver account pays 4.6% if you increase
your balance by 200 every month at the moment). Maybe allocating a small small
amount of my capital to more risky small caps – one that really interests me at
the moment is Greencross LTD.

Good or bad, the decision was made and executed. I
thought it was an allright decision and hopefully wouldn’t regret it in the
future. What do you think? Had I done something foolish? Would you have made
the same decision if you were in my situation? Do leave a comment or send me an
email, I’m always happy to hear different opinions.

Monday, March 4, 2013

So as promised, today I’m going to write a bit about what I know on price to book ratio (P/B ratio). Much
like P/E ratio, P/B ratio is an indicator that can be used by value investors
to signal if a company is under or overvalued. Also like the P/E ratio, it
should not be used alone to judge a value of a company, if a low P/B ratio consistently
points us to an undervalued company, we’ll all be rich.

To calculate the P/B ratio you divide the price per share
by the book value of the equity:

P/B ratio = Price per share/Book Value

Book value is the company’s assets minus its liabilities.

So from that formula, we can say that the P/B ratio
compares the current market valuation of a company to the value of the
company’s assets. A P/B ratio of less or equal to 3 typically interests value
inventors because it could mean that the stock is selling at a discount to its
fair value.

A company’s P/B ratio can be calculated including or
excluding its intangible assets and goodwill. A P/B ratio calculated without
intangible assets and goodwill should technically be called price to tangible
book value.

Personally, I like to look at the price to tangible book
value to get an idea of what might happen if the company that I'm deciding to invest in goes bankrupt. Obviously when a company goes bankrupt, one of the things they
can do is to break up the company into little packages and sell off their
assets in blocks to other people. By looking at the P/B ratio I sorta get an
idea of how much of a premium above the company’s assets I’m paying.

Thanks for reading, hope you’ve learnt something from the
post. Is the P/B ratio one of your favorite indicators? Or you don’t even look
at it. Do leave a comment or send me an email if you have anything to add. Next
week I’ll write about my first trade in 2013. Have a great week!

Monday, February 25, 2013

First of all, sorry for being one day late. I was in Sydney for Soundwave yesterday and did not have access to a computer. Secondly, today's post will not be about P/B ratios. I'll write about them next Sunday :P

So about a week ago I was having a lovely conversation with a friend, we got along quite well and our conversation seemed to flow seamlessly from one topic to another. So for some reason we ended up talking a bit about Japan, about their economy and mentioned something about negative interest rates. It is something that I’ve heard about but never really did any research on. So after the conversation I’ve decided to so some homework and study a bit about interest rates.

Basically interest rate is the rate that is paid by borrowers to borrow money from a lender. So if I lend you 100 dollars and say you have to pay me back 110 in 6 months, the interest rate would be 10/100 x 100 or 10%. Interest rate targets are set by central banks or reserve banks to try (I emphasized ‘try’) and deal with things like investments, be it in businesses or shares, inflation and unemployment.

Generally, interest rates are reduced to encourage investments and consumption. This makes sense because if interest rates are low, it becomes a disincentive to hold cash. If you have cash that is making you 2%, why not put it in a company that could earn you 5% in dividends and potentially more in capital gains. Low interest rates also give people access to cheap money. So it means I can borrow more money because interest rates are low, I only have to make a small amount from that money to cover my cost.
As you can imagine, this theoretically can stimulate the economy a bit and when there is more money around, things start to become more expensive, i.e. inflation. Then the central banks will increase the interest rate targets to try and catch up with inflation, encourage people to save more cash and make it more expensive to borrow money.

There are two main types of interest rates; real and nominal interest rates.

Nominal interest rate is the amount of interest payable so like before, if you make a deposit of 100 dollars and get 110 at the end of the year, the nominal interest rate would be 10/100 x 100 or 10%.

Real interest rate tells us the purchasing power of the interest because it takes into account inflation. So if you make 10% interest from your deposit but prices of food went up by 10% in that same year, your purchasing power did not actually increase and your real interest rate would be 0%.

So back to Japan and negative interest rates. From the very little reading that I’ve done, negative nominal interest rates are a very very rare occasion. Whereas negative real interest rates are a lot more common. You can imagine if the interest rate is close to zero say 1% and inflation for the year is 2% a -1% real interest rate is quite easy to imagine, you don’t actually lose money by putting your money in your bank, you lose buying power (which is sorta the same thing at the end of the day).

However can you imagine actually having negative nominal interest rates? Meaning if you deposit money in a bank, you’ll get less out when you withdraw it. Something like this happened before in Sweden back in 2007 when Sweden’s central bank, Riksbank, reduced its interest rate to -0.25%, requiring banks to pay that amount on the money that they have deposited in the central bank.

Something like this has also happened in Japan for a short while when investors who bought short-term Japanese Government bills made negative yields. (Keep in mind we’re talking about central banks and government bonds, we’re not talking about consumer banks, I cant imagine what’ll happen if consumer interest rates ever become negative.)

I think it is fascinating and a bit scary that things can get so bad that you’d rather lose money by holding cash than put money into other investment vehicles like properties and shares to avoid the risk of losing more.

Thanks for reading, feel free to drop me an email or leave a comment if you anything to add, correct or clarify about the post.

Sunday, February 17, 2013

So first of all, I have to say I am not sure what the
aspect earnings model is. So if anyone would like to shed some light on that,
please please please post a comment or send me an email. Otherwise I’ll spend a
bit more time doing some research and trying to find out what it means.

P/E Ratio or price to earnings ratio is quite simple to
understand I think. Basically it is the company’s current share price compared
to the company’s earnings per share. So in other words it is:

Market Value per Share/Earnings per share (EPS)

Say company XYZ’s current market value is 20 dollars and
the earnings per share is 2 dollars the P/E ratio would be 20/2 or 10. The math
is very simple but what you make of it is a different story I guess.

Some people look at the P/E ratio as a marker of value
and some look at it as a marker of future growth. So a low P/E ratio 0-10 can
mean that the company is undervalued or the company’s earnings are thought to
be in decline. A P/E ratio of 10-17 is usually considered fair value and a
company with a higher P/E ratio say 17-25 can be considered to be overpriced or
have a lot of potential for growth.

It is always important to compare company’s P/E ratios
within their relevant sectors. For example, mining companies that are still
exploring may have a very high P/E ratio and when they find something their P/E
ratio might go even higher. Does this mean that the company is overvalued? I’m
not sure. But I know it can also mean that the company has found something, is
working on extracting it and will eventually (hopefully) earn some money from
it. In this case, the high P/E ratio can be normal and is more reflective of
the company’s future earning potential.

On the other hand, if we were talking about a bluechip
supermarket company, some people might view the P/E ratio as an indicator of
its current value. If the earnings per share is 2 dollars and the current
market value of the share is 50, that gives you a P/E ratio of 25 which can be
considered high. If one day the supermarket is found to be selling chicken
infected with salmonella, an overreaction from the market could push the share
price down to 20 dollars, bringing the P/E ratio down to 10. Now if the company
is unlikely to go bankrupt from this event, and you think that they will
eventually go back to normal you can say that the company is currently
undervalued and can buy some shares in them.

Another way to look at this P/E ratio is the long term
average. Say a company is earning 2 dollars per share and it’s long term
average P/E ratio is 15. If it is trading at P/E of 10 ($20) for whatever
reason, and you anticipate the prices to rebound to its long term average of
15, it will be a good idea to buy because a P/E of 15 would mean that the
market value of the share will be 30 dollars.

I think the most important thing of all is to not judge a
stock/company purely based on the P/E ratio. Always remember to look at
everything else. Look at the company’s website, etc. So is P/E ratio something
that you always look at before buying into a company?

Friday, February 8, 2013

Since my last post, I've finished medical school,
accepted a job offer in Canberra Hospital and received my first pay
check, all of which went into my credit card because I had been living 3
weeks without any cash before that. I've more or less moved into a new house in Forrest, which is supposed to be a fancy suburb in
Canberra. So things has changed quite a bit for me.

I've
decided that since things are starting to settle down and I wont have
any more exams for the next two years, I should dedicate more time into
investing and saving. As a result, I am going to do some revision on
financial statements, balance sheets and key indicators.

Below are examples of how they look like.

Key Indicators of Greencross Limited extracted from ComSec

Financial Statements of Greencross Limited extracted from ComSec

Balance Sheet of Greencross Limited extracted form ComSec

Every
Sunday starting from 17/2/2013 I will write a post about an indicator until every key indicator
and heading in the financial statement and balance sheet is covered.